World Bank pans govt subsidy program
World Bank pans govt subsidy program
JAKARTA (JP): The government's huge subsidy commitments are
unsustainable and could lead to economic disaster if the policy
is not revised, a senior World Bank official warned yesterday.
World Bank Indonesia director Dennis de Tray said the
government must carefully set a clear focus in its fiscal
program.
"Subsidies are clearly not sustainable," he said at a capital
market conference, warning that the program, if not revised,
could lead to economic disaster in the long term.
He added, however, that the World Bank and the International
Monetary Fund fully supported the subsidy programs for the short
term to help the poor survive the economic crisis.
De Tray indicated that the government was currently devising a
program which would better target the subsidies.
The government has allocated a huge amount of funds to
subsidize basic staples, such as fuel, rice, wheat flour, cooking
oil, medicines and sugar, in its current budget ending in March
1999. The subsidies are largely responsible for creating a record
deficit equivalent to 8.5 percent of the gross domestic product
projected for the state budget.
Most of the deficit is being financed by international aid.
A group of 15 local economists last month lambasted the
government over the huge subsidies, saying they comprised a
populist policy merely to win support for President B.J.
Habibie's administration.
They argued that the subsidies were unsustainable and could
lead to uncontrollable inflation.
Economist Anwar Nasution said yesterday that the Habibie
administration must strictly limit its subsidies to certain
commodities to prevent even greater economic turmoil in the
future.
He said subsidies for cooking oil, flour and fuel were not
necessary because they were not essential for the poor to survive
the crisis.
De Tray noted that Indonesia must not only address its capital
outflow problem but also the increasing level of human capital
being drained due to worries that social unrest like that seen
during the May riots could recur.
"Reversing capital outflow is an important element to
recovery, but the key issue is the entrepreneurial capital
flight, which is a major loss to the country", he said, adding
that the key to solving the problem was to restore confidence.
Many talented Chinese-Indonesian professionals fled the
country following the May riots which were seen to target the
ethnic group.
"Confidence of the Indonesian people may not return until a
political change is underway," de Tray said.
"Another important thing to remember is that it is action, not
words, that restores confidence."
He said the government must also be aware of market perception
regarding its actions.
"You have to stay ahead of the expectation curve. Good
policies that lag behind market expectations will not restore
confidence," he added.
The government, he said, must improve on its poor public
relations capabilities to win international confidence.
"Indonesia is in the business of selling itself... and it is
competing with other crisis-hit countries in the region."
(rei/gis)